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 May 3,
2009 Commentary (monthly edition)-
Another month
goes by, and it sure wasn't a dull one. Maybe as summer approaches, given we
are now in a 'bull' market, it may get a little slow. We are already getting
some 'grindy' action that is typical for this period. On the other hand, if we
go back to some downside action, I'd expect things get more volatile. One thing
I will say, and I've heard this from all the good traders I know, I sure like
the volatility. Nothing like ten point swings in the ES in minutes to keep one
busy. This grinding for hours and moving four points sure is boring compared to
what we've all gotten used to, and started to take for granted.
I'll fire off
a few gripes about the lunacy out there, as I usually do, with some thoughts,
and then after a quick item or two of business, we'll get started. I have some
interesting things on deck for today. So, as far as crazy economic things, the
choices are endless. I'll cover a few of my favorites. The one that just
agitates me to no end, really makes my skin crawl is 'green shoots'. Okay, yes,
some things aren't continuing in free fall any longer, but that's a 'green
shoot' of recovery? Let's explore this.
Say industrial production is dropping like a
rock, for example. It can't drop at that rate for much longer, or every factory
in the country will be idled. At some point the rate of decay slows. They call
that a 'green shoot'. Recovery is likely started. It's started because the rate
of decline is slowing? How do you know it isn't a 'rip' (the opposite of a dip
in an uptrend) in a downtrend? The bottom is in because you have on tiny
bounce, and it isn't even a bounce, per se, it's a slowing of the angle of
descent of the downtrend. I came up with an analogy for this scenario.
Someone is
whacking you on the head with a big stick, say sixty times a minute. Not fun.
After some period of time the person's arm gets a little tired, so they slow to
whacking you only forty times a minute. Do you jump up and down, have a party
and celebrate? Things are great now because this is a 'green shoot' of recovery
from the hitting process? It's great you are only getting hit forty times a
minute? You know when I celebrate? When the hitting stops, and the headache
goes away. Then talk to me about a celebration. But here's the curious thing
about economists and the talking heads.
When do they like to say 'it's over'? When
the trough is in. The low point. The point where things are on a steady incline
upwards. But think about that. If we were losing say a million jobs per month,
and this has been going on for months and months, then we one day move to only
nine-hundred thousand a month, and then eventually to eight-hundred thousand,
and so on, the recession is over. Things are great. Recovery is on the way, and
the stock market soars. Things are great because we are only losing
eight-hundred thousand jobs per month? Just ask those eight-hundred thousand
how great it is. But you can't fight human nature and blind optimism, and
talking heads with agendas.
Now, I'd like to see this seventeen-month recession end,
just as everyone else out there would. But what I don't want to see is bad
decisions being made based on 'green shoots' of recovery that aren't warranted.
The issue I have is that there are so many shoes left to drop I feel like we
haven't even gotten started. Commercial real estate, resets on Alt-A mortgages
starting this summer, the complete insolvency of the banking system by any
rational measure (in my opinion, and opinion only), and on and on. As usual,
none of the true root causes have been addressed, and all they've managed to do
is steal a whopping load of taxpayer money, keep zombie bank and zombie systems
going while rewarding those that caused the issues and punishing those that
followed the rules and weren't part of the problem.
This all fits
together with other things that we see in here. For example, is this a bear
market rally, or a new 'bull'? My own thinking would be 99% chance it is a bear
market rally, but we have no experience dealing with intervention at this
level. Reflate, no matter what. If you have manyfold times the entire market
cap to pump in, it's going up, period, end of story. A bear market rally turned
into a new 'bull'. Who knows, it may be happening as we speak. But here's a few
things I am pondering. First, the steepness and speed of this run is consistent
with bear market rallies, not new bulls. According to the research I read, not
one new bull in the last hundred years started this way, only bear market
rallies. And every one rolled over.
Next, sentiment is so bullish it is just
nuts. Every talking head is saying it's the buy of a lifetime up here all this
ways up. They don't even say wait for a dip, because the dip may never come.
Just buy here. I follow about ten sentiment gauges and every one is at the
level that an intermediate top was put in so far in this bear. Now, if this
rally is like the big one, say, after the '29 decline, then those gauges may
get higher than previous highs. But the stage is set.
I also hear
how the market is reflecting a recovery in the second half. You know what? I
think a recovery in the second half is less likely than that I might flap my
arms and fly to the moon tonight. Heck, maybe I'm 100% wrong, maybe we are
already on the way up. I hope so, I just don't see it. And if we do see a
'recovery', I think it will be as genuine as those last quarter bank earnings.
Record profits, highest ever, in this environment? No way, no how will I
ever believe those are 'real' earnings. And if this comparison holds,
then we are headed for a 'double dip' of huge proportions, I think.
They gun this up, inflate
everything, push the 'green shoots' all day long on every television station,
the market is forced up and up and up, and people start to buy, start to hire,
start to invest, and so on. But it isn't 'real', and must fall of its own
weight. Then all the people who got sucked in get hurt real bad, and they were
already hurt. And that's my objection. We are all being goaded into doing
things that may leave us devastated, and then where will the 'goaders' be?
Nowhere to be found, of course. As I said before, this market may rally 50% or
more, but that doesn't change that we are likely in a secular bear trend that
may not end until 2017 or so.
I also have heard they have now figured a way
around the compensation rules, and a way around limiting leverage. I also saw a
chart showing capital ratios at some big institutions (I won't mention any
names because I don't want to get any late night knocks at my door telling me
not to stir the pot), but they were so 'off the chart' I was blown away. I
guess that's why they are 'debating' (notice they didn't choose the term
'discussing') the results of the stress test, and not telling us what they are,
again. Hmmmm, I wonder if we will get them later in the week or not? I guess
once they get the results to say whatever they want them to say they can then
release it. May the farce be with you...
Ah, what's the use in going on with
all this. It doesn't much matter for the trading anyway. It just matters for
you and I as citizens, and maybe a little in position trades we may be looking
at for retirement accounts and such. I am just so sick of all the shenanigans,
and listening to all this nonsense, I feel like they think we are all just so
stupid we can't even see what they are doing. We know what they are doing, we
know they are robbing us blind, we know it isn't going to end anytime soon, so
stop talking smack and just drop it. If I hear 'green shoots' one more time I'm
going to puke.
Now, on to one small item of business. I am going to be adding some
books to the Recommended
Reading page, and a new testimonial or two to the Testimonials page, hopefully
this weekend. I'll put a note in the What's New section after I do
that, in case you want to check there to see when it's done. The Recommended Reading page is very
popular, so I figured it was time to add some of the newer books I've been
perusing lately.
Let's move on to today's work. I won't update the rates chart,
again, but make sure you look at it. We have now broken that 'key' 3% on the
ten-year (and look at that 30-year go!), and the market could care less. But
that was supposed to be an important area not to go above, so as not to disrupt
the 'green shoots'. I guess 'green shoots' grow no matter what you put on them.
Also, go back and look at my chart on those ten-year rates and look at the time
factors on there. The low was, again, at the time factor I suspected (or should
I better say 'seasonal time'?), and now we are getting into the May/June
seasonal time for a high. This will become more interesting after today's work
in the indices. Make sure you go back and look at this before you read
on.
Let's start with last month's chart of the month, and then we'll
get to today's work on time factors.
Here's last month's chart of the month. I've
been waiting on that mid-880's area for some time now. All that work was on my
charts essentially as soon as the low was put in. The three key levels are easy
to see, and the lines contribute to the time factor, in that the intersections
of the area lines with the set lines points not only to a price area but also a
time.
Let's move up to where we are now.
The markets had a chance to burst right up to
the first area and hit the time factor dead on, but instead it chose to slow
down and grind its way up. It formed a beautiful 'ending diagonal' or 'rising
wedge', which you can see on the chart of you look closely. I posted about this
in the Kane Trading public forum over at MyPivots. If you want to look at that
just check it out over there The issue was that after awhile every last human
on earth involved in the market had posted that, put it in their newsletter,
did a video on it, and so on, so it just wasn't going to play out as bearishly
as it might otherwise. I commented on that in my postings.
If you still
have the standard median line set on your chart, like my last chart from last
month's commentary, this has just been grinding up along the median line. Once
the 'rising wedge' broke down (off an area I posted in advance over at the
forum), it came back up to test the line from below three times so far, even as
new highs were set. The key area was finally hit in the mid-880's, and a nice
sell started. The two key downsloping lines have been penetrated a bit, but if
you look back on your own charts you will see you can do some offset lines,
hence this is not an issue with the area in here.
So, even though it rushed right
back up quite a bit, and finished strong, could that be it? Sure, it might be.
At this point I just have to see how it unfolds. If it doesn't want to do any
more than that off this area, then I'll just follow it up to the next area, if
it gets there, and see what it does there, and so on. Once we get to today's
work we will have some additional time factors to add into the mix. One thing I
will say here, the momentum, or should I say the angle, of the price action to
the upside has slowed quite a bit, and this still has the look of a 'rising
wedge' to me. But never fight manipulation. Until the 'manipulation ramper
robot drones' stop inflating this, it's going up. So, I just go with the
flow.
Let's move on to some work on time factors, something I get asked
all the time to do more of.
When the infamous 666 bottom was put in on
3/6/9, were there any obvious time factors that pointed to that period for a
reversal? The one I like most is illustrated on this chart. If you are very
scrupulous you might pick up on the fact that I anchored the first point on Nov
5 and not the actual high shown here of Nov 4. I would have preferred to do
this chart with ES continuous contract, but I can't get the data into the
charts for in here yet, so I used S&P cash. The high in ES was on Nov 5,
not the 4th, so I just anchored there, even though this chart shows a slightly
lower high for that latter bar. Notice how this pinpointed the low exactly.
Also notice it was almost Nov 6, Jan 6, Mar 6. Very curious. Note that this
isn't a 'well-chosen' time factor, this is one of the ones I use all the time,
day in and day out, all the way down to 1-minute charts.
Let's look at
where we are right now, with some time factors.
I'll start with a 'reflection' time factor,
or more technically, a 1.000 time retracement. (I also drew on a reflected
line, what many call a 'V'.) That calls for a potential reversal on May 5,
which is this upcoming Tuesday. Note, too, if the market chose to 'shoot up'
instead of just grind in here, it would get to the next higher area around 942
(basis ES) on my charts. Note that this is a different manner of time counting
than the last chart.
I'll add on another time factor.
I noticed that a very common time approach
that I use had the .618 time retracement coming into this same area this
upcoming week, this time on Thursday, May 7. This may allow the market enough
time to move up to the higher area. Or, it may grind until then and drop from
here. Or it may ignore everything I have, time and price wise, and do whatever
it wants. All I can do is see what it gives me.
Let me add one more time factor on
there.
Here I did a price projection, another very
common approach and choice of swings for me. This one also falls in on May 5.
So, I have a very solid area from May 5-7 where this thing may top out (sell in
May and go away...). I have no idea if the market will 'see' this time at all
or not, just as I have no idea if it will 'see' a price area I am interested in
and keeping a close eye on. All I can do is watch and see. But I am showing
here some of the methods I use to look for areas. And when they 'group' for me,
that's what I am looking for.
Now, let's look at one additional thing that
really jumped off my charts at me.
I noticed that one of the cycles I like best,
one of the ones I give more priority to in most cases, is pointing out to the
middle of June. Hmmm, recall the time factor for rates I mentioned when we
started today? The June time factor for a top in rates? Let's see, rates start
down, hence treasuries start up. Treasuries up, money moves out of the stock
market into those treasuries. Flight to safety or just asset allocation swap,
it is a very curious time factor. Now, rates may top earlier, even in May. In
2004 they topped on May 14, in 2001 it was May 18, in 2000 it was a double top
on May 9 and 18, and so on (and some years it was in March). So, the area of
May/June is where I am watching for a potential shift, and that hits with the
two time areas we see here in the indices.
Now, let's go back to the first
chart, with just one of the time factors added on for May and June, to get the
eye to the right spots.
The arrows show where I am most interested in
looking short. We might be there now. Notice, though, if we can jump up to the
next level later next week we hit the chart area (price, and time from the
lines) and the time factor all together. I wish I had moved that middle arrow
to the right a quarter inch, as that would better reflect where I am most
watching, but I didn't see that until now, so we'll have to live with it there.
Notice how they line up nicely. If the market went nuts, and it could on some
crazy news, it could hit the upper arrow area, with the price level and line
time, and time factors all right there together.
Finally, where I put the question
mark, this might do a summer grind up that line (the median line, not shown,
from that standard set, runs just under the red line there), hitting the middle
level right as the line time and the June time factor come together. Or it may
do none of these, hitting right between my price and time areas, making my job
to find a good trade setup as difficult as possible. You know what they call
that? Trading. It happens. All I can do is set up areas where I feel I might
have a potential edge, and then see how it acts if it gets there, and make a
decision if I want to make a trade or not. Today I've shown one more thing I
may be doing as I set up potential trade areas.
I hope that everyone enjoyed a look
at some time factors. I always get a lot of comments whenever I do time
factors, and to this day I still get asked when I am going to do a time factor
book, because early on I had planned to do one, and mentioned that in Kane Trading on: Advanced Fibonacci
Trading Concepts, I think it was. We'll have to settle for what I can
show in here, as my pen is hung up, but I can say that I am doing more and more
with one-on-one students when it comes to time/cycle work. Just this past
weekend I was showing one student this really amazing symmetry thing I found in
a particular Elliott sequence where the time and total price movement within
these particular waves tends to balance out the same for time as for price. Not
only do I find this particular relationship useful for trading from a practical
standpoint, but even more so, just endlessly fascinating.
So, as we end
for the day, will the May time factor kick in here? Will it be the June factor?
(Let me mention, a lot of other people are seeing time factors in May
and June, too, and that worries me...) Or none of the above? And doesn't an up
until June (or even May), down hard to new lows into September/October sound
just so technically beautiful? No matter what it does, one thing I can be sure
about, it will do it with beauty, harmony, grace, and eloquence. And how do I
know that? Because it is the market, and that is just what it does...
The next
commentary will be next month's edition, posted by Sunday evening, June 7,
2009.
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